- The April jobs report left little doubt that the economy has reached full employment. Unemployment fell to 4.5% in March, below most estimates of its sustainable level in a healthy economy, or the natural rate. Other indicators also point to stronger conditions. For example, the number of workers who reported being involuntarily part time employed continued to tick down, and despite considerable downward pressures associated with the aging of the baby boomers, the share of adults working or looking for work has held steady. We expect labor market conditions to remain robust in the coming years, putting additional upward pressure on wages and prices.
- With the cyclical effects of the Great Recession mostly behind us and monetary policy normalizing, the economy is moving towards its sustainable steady state. But the “new normal” is expected to look a lot different than the old. Assessments show that a sustained expansion will be characterized by real GDP growth of 1½% to 1¾%, job growth of 50,000 to 100,000 per month, and a neutral federal funds rate of around 3%.
Projections of normal GDP growth reflect assessments of labor force and productivity growth. Expectations for these elements, especially for labor force growth, are much more modest than in the past.
- Labor force growth is largely determined by population demographics, which in the U.S. has been shaped largely by the baby boom generation. In the 1970s and 1980s, the labor force grew quickly as baby boomers hit working age and greater numbers of women entered the labor market. Baby boomer retirements have already started to curb labor force growth and will continue to do so for the next decade. The Congressional Budget Office projects that the U.S. labor force will grow at about a 0.5% annual pace through 2027.